Labor: The incredible value of stand-alone confidentiality agreements

If your company has information that helps it compete (and all do), don’t overlook one simple measure that can help protect that information, and all that goes with it.

One of the simplest measures for protecting a company’s intellectual capital, including information about its competitive position with critical customer and supplier relationships, is simply not used widely enough. Using a brief stand-alone confidentiality agreement, broadly across the workforce, can help set a backstop against departing employees being scot free to take their knowledge and relationships “across the street” to a competing employer.

It happens all the time — employees leave one employer to join a competitor. The departing employees immediately pursue similar activities and actively solicit the first employer’s customers and vendors, and their quick success shocks the first employer. Such employees need not be the most highly placed executives or even the lead salespeople; they just happened to know where to go, who to see and what to say. Accordingly, the first employer cries foul and calls counsel, demanding some immediate action. But, for whatever reason, these are often employees who never signed any employment agreement with the first employer. What can be done if there is no non-compete agreement, no non-solicitation of customers restriction and no other restrictive covenant protecting the first employer from such competition?

The most obvious fallback under such circumstances, where no restrictive covenant applies, is to look for the employees’ misappropriation of “Trade Secrets” and the use of confidential information. In such a situation, a brief stand-alone agreement, set up during the on-boarding process, or even supplied later in the course of employment, can make a significant difference. And the absence of such an agreement can make taking any legal action against such employees much more difficult.

A brief stand-alone confidentiality agreement focused on protecting the most basic and universal areas of confidential and proprietary information—typically customer and vendor information, product, pricing, marketing and strategic planning information, and “methods of doing business” information—is something every employer should consider as part of the on-boarding process for every employee who will have access to and use such information. A few observations can make this point crystal clear.

First, it is important to understand that a confidentiality or non-disclosure “policy” cannot provide the same protection as a stand-alone agreement.

A policy, especially a policy about what information a company regards “confidential,” combined with policies about other employment matters collected in an “employee handbook,” is typically not an agreement. A policy about confidential information is simply a statement about the employer’s expectations for its employees. An employee’s acknowledgement about such a policy is just an acknowledgement that the employee knows about those expectations. Even if there is a signed acknowledgment of the handbook or the policies (and typically a signed acknowledgment says simply that the employee received the handbook, is supposed to become familiar with the contents, and agrees to follow the policies), this is really just an acknowledgment of receipt. It most typically means that if an employee fails to comply with the policies, he knows that he may be disciplined or fired in response to such non-compliance.

Such a “policy” statement, even with an acknowledgement page, will not create a contract enforceable in a court; and with former employees, it hard to see any connection or lasting impact. Employers typically can’t sue for damages, or seek injunctive relief, in relation to a policy. And of course, on the other side, employers should be very wary of ever contending that handbook policies carry the force of an agreement on either party. Employers often get in trouble with policy statements about “progressive discipline” when they seek to immediately terminate an employee for a particularly egregious violation of policies. Most employers work hard to ensure that such policies do not create contractual entitlements, and certainly do not want a handbook to modify an employment-at-will relationship. The last thing most employers would want to do is to hold up a handbook and contend that it’s an agreement that a court should interpret and enforce.

Second, the specific, explicit protection provided by a stand-alone agreement —the power to bring a lawsuit, to conduct discovery, to pursue monetary damages, and even to seek injunctive relief, can provide leverage in negotiations dealing with competitive activity by former employees. If it can be shown that the departing employees removed any information from the first employer, by taking materials, downloading files, or e-mailing to personal e-mail addresses on the eve of departure, or by taking action in the marketplace that would only be possible with such inside information, a stand-alone agreement will provide a straightforward breach of contract claim against such activity. With the leverage provided by the agreement, the first employer may be able to demand and extract significant concessions from the new employer or dramatically restrict the activities of the departing employees.

Third, to the extent that an employer is considering a claim that former employees have taken statutorily protected “Trade Secrets,” such that additional damages or fees may be available as remedies, one of the first questions that will be raised is whether the employer exercised “precautionary measures,” “reasonable under the circumstances,” to preserve the confidentiality of its sensitive competitive information. A helpful Exhibit 1 for the first employer will be the confidentiality agreement that all of its employees are asked to sign at the onset of employment. In the absence of such an agreement, the first employer will be fighting an uphill battle to prove in fact that it does exercise precautions to protect its sensitive information, and that failure may doom any claim that it has information that rises to the level of a “Trade Secret.”

There is one trap for the unwary with such confidentiality agreements. There has been recent movement from the National Labor Relations Board (NLRB) criticizing nondisclosure policies or agreements that restrict the sharing of basic identification and contact information about other employees. In one recent opinion (Quicken Loans, Inc. and Lydia E Garza), the NLRB found that the employer violated the National Labor Relations Act (NLRA) by using an employment agreement that defined proprietary confidential information as including “personnel information including, but not limited to, all personnel lists, rosters, personal information of coworkers” and “handbooks, personnel files, personnel information such as home phone numbers, sell phone numbers, addresses, and email addresses[.]” In this case, the NLRB reasoned that such restrictions prohibited employees from disclosing to each other the names, wages, benefits, addresses or telephone numbers of each other and that this would substantially hinder employees in exercising their rights under the NLRA to engage in concerted activity.

Consequently, employers should not cast the net too wide by including all employee information as confidential and restricted. Instead, employers should target sensitive, not otherwise publically available business information, such as customer and supplier lists and preference information; product, pricing, marketing and strategic planning information; and “methods of doing business” information. Having this simple agreement in the bag, broadly used with relevant employees, can be a game-changer when departing employees turn out to be more dangerous than anticipated.